Author Topic: $151k in Student Loans -- Pay Off in 2 Years; Refinance; or Middle Ground  (Read 5238 times)

ReadySetMillionaire

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Summary

I have $151,000 in student loans with an average rate of 6.41% (the highest one being $27k at 7.65%). I started my own law practice last year and it has taken off.  My household income this year will probably be about $185,000.  Necessary expenses are probably $65,000 (including law office expenses), so after taxes, I have about $75-80k to throw at something.

Can't decide whether to pay these loans off in two years, whether to refinance (I can get 10 years at about 4.5%), or something in between. I also have about $50,000 in cash right now (no 401k investments this year, though).

Background

I gained some notoriety on the forums a couple years ago with my "Gaming REPAYE (Student Loans)" thread: https://forum.mrmoneymustache.com/ask-a-mustachian/gaming-repaye-and-the-student-loan-system-($148-000-debt)-to-achieve-fire-at-45/

Basically, and because my income was relatively low compared to my standard loan payment, it was a theoretical plan to lower AGI in an effort to pay as little as possible towards my student loans and have the balance forgiven after 25 years.  Alternatively, if income ever dramatically increased, then the program would have effectively been used as a temporary measure or hedge to allow me to get started in other financial areas other than focusing solely on my loans.

So about that: my loans were initially $148,000 in 2014. They have gained $3,000 in interest. I've paid about $20,000 towards them in these four years. But, our retirement accounts are at about $112,000, we bought a home, and we paid off our cars. So using this as a "hedge" until there was more income to tackle these loans is almost exactly what happened.

Getting to today, I started my own law practice last year and it has really taken off. I've already made $58,000 so far this year (without sending out May invoices) and things seem to be picking up, not slowing down. This amount of income means that there will never be any forgiveness, and my payments are about to go way up.

I expect to make about $140,000 this year. My wife should also make about $45,000.  This leaves us with a ton of discretionary income to do...something.

This, and also having our first kid in March, has kind of caused me to freeze.  I'm sitting on $50,000 excess cash (i.e., beyond our e-fund amount) and don't know what to do with it. It's important to note that we have not invested anything in 401ks this year, or HSA, or Roths, or anything. So maybe this cash should go to that? I don't know, see below.

Options

The loans total $151,000.  There are nine separate loans with an average rate of 6.41%.  The loans can be broken down as follows:

One loan at 7.65% totaling about $28,000
Five loans at 6.55% totaling about $60,000
Two loans at 6.16% totaling about $33,000
Two loans at 5.15% totaling about $30,000

Aggressively Pay Off Loans: Having focused on saving these past four years, I emotionally just want to get rid of these ASAP.  I figure I could take my current cash, dump it on the loans (from highest interest rate to lowest), and pay them off by the end of next year.

The basic thought here is that this is an emotional win, and I don't see too much harm in foregoing investing for just two years.

The cons are missing that investment time and, further, paying significantly more in taxes. In other words, 401k is both investing (and the fruits of compounding) PLUS a huge tax win due to my tax bracket.

Refinance: While the above would be emotionally appealing, the math play might be to refinance.  I can get 10 years at around 4.5%.  This would allow me to invest, and I'm sure the math would lead to a theoretical increased net worth by the time I'm 40.  It would also probably mean way less in taxes these next two years.

But the "by the time I'm 40" part is the problem to me -- having a $2,000 payment for nine years just strikes me as sucking too hard to deal with for almost a decade.

Middle Ground: While I'm not really leaning towards refinancing, the option I am more strongly considering is a hybrid approach where I stay on the income based plan, invest, and then dump whatever falls in my lap on the loans.

The thinking here is that this gives me the flexibility that federal student loans provide, which usually means low monthly payments. This in itself acts as a hedge.  Then, at the end of the year, when I've invested enough to my satisfaction, I could just dump the remainder on the loans and hope to pay them off in 6 or 7 years. This seems like a no pressure solution that achieves a bunch of goals at once.

Conclusion

All that said, this thread is going to probably be talking me out of just paying these darn things off ASAP, which is where I'm strongly leaning after using the REPAYE program for four years.

Any thoughts?

dandarc

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You should refinance regardless of whether you aggressively pay down the loans or not - interest is lower than your lowest one, so the refinance will save you money.

Then the math says keep that debt at a low fixed rate as long as possible and invest. Certainly don't pay it down before any tax-advantaged accounts are maxed out - you're high income now, deferring taxes should be a big priority.

Rosy

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Stick with what the math says and refinance stat.

This is your first year of being in business for yourself - don't get emotional about your money and debt pay off - you simply cannot afford to do that - yet.
Refinance - stat.

If things are looking up by year 3 or 5 of being in business - by all means tackle the loans for the emotional win and freedom of all debt. But right now - it is too soon.

ReadySetMillionaire

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@dandarc and @Rosy --

You both seem pretty confident. What's the math behind your answers?

I'm not the greatest with numbers and my rough guesses, which admittedly included a ton of assumptions, had only about a $25k net worth difference by age 40 (nine years from now). That seemed like a pretty minimal difference, big picture, for a big emotional and psychological win.

I should add that my business model is pretty consistent in that, worst case scenario (other than disability), is that I profit about $3-4k a month. I feel extremely confident about this.

Peachtea

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Permission to pay of those loans ASAP granted! If you can put 80k a year plus your 50k extra towards them, youíll actually be done in less than 1.5 years. I think itís worth going all in with that short timeframe; itís not going to put you too far back in investments/taxes and will be a huge a mental relief. I actually was just talking with an ex-coworker who did time at a big firm for 3 years before going gov and she talked about how sheís so glad she paid her law school loans off ASAP while at the firm and that even now, over seven years later, she gets a surge of relief whenever someoneís talking about their loans. She said having that mental weight gone is indescribable and (as someone with 250k) I can 100% believe it.

No way would I refinance with your numbers. You have a baby (congrats btw), your wifeís income is not very high, and youíre self-employed. What happens if you have an accident and become permanently disabled or die? With federal loans your loans are discharged. With private? Iím not aware of any private loan discharging for disability, and death depends in your contract and/or state laws. Private loans donít adjust based on income, federal loans do, so if something less drastic happens that greatly reduces your income, youíre also covered with federal loans. Otherwise if you do refinance, make sure your life/disability insurance amounts are enough to both provide for your family and wipe out the loans.

If you use the 50k to pay down highest interest, your new average is about 6% or only 1.5% higher than the refinance option. Thatís only $1461 more in interest if you pay off the rest of loans in 1.5 years, but you gain the disability, death, and flexibility benefits by keeping federal. Plus then you donít have to go through hassle of refinancing. And really if you give yourself permission to throw everything at these loans, I have a feeling they will actually be gone in a year. Honestly even over a  10 year pay off period, Iíd probably view the extra $1775 a year in interest as worth the flexibility fed loans provide.

John Galt incarnate!

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@dandarc and @Rosy --

You both seem pretty confident. What's the math behind your answers?

I'm not the greatest with numbers and my rough guesses, which admittedly included a ton of assumptions, had only about a $25k net worth difference by age 40 (nine years from now). That seemed like a pretty minimal difference, big picture, for a big emotional and psychological win.



 If your  "big emotional and psychological win" enhances your  happiness, and your "rough guesses" are correct that  your NW will be reduced by only $25K  9 years hence, I would not hesitate to advise you to opt for the plan that boosts your happiness. 


dandarc

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The math is just the stock market averages about 9%. You can borrow at 4.5%. Therefore, a dollar will earn more being invested vs. being payed to the debt.

Plus if you're not maxing your traditional retirement accounts first you have less money today than you otherwise would. Can't pay the debt with before-tax dollars.

Finances_With_Purpose

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You want to be rid of those loans.  You had a great year, but who knows what the future holds.  Though I suspect you have other good years ahead.

I'd do both: refi to 4.5% AND throw extra available cash to the loans.  Max your 401k then throw all else on the loans. 

The trick is: once the loans are paid, treat your investments like your loans and kill them too.  I'm sure you'll do so. 

Goldy

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Another vote for paying them off aggressively.  Does the refi have any fees?  If not then Iíd probably do that to save the extra interest but if there are fees Iíd just leave it as is.

Catbert

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In deciding how much you can afford to pay on loans each month, figure on maxing out all available retirement accounts.  Once a year is over you'll never have the opportunity to pay into it again.

While a refi may be the way to go, I wouldn't count on making what your making this year every year.  Sometimes income goes down as well as up.  I would probably go a middle ground - refi some but let some ride for the potential advantages of  SLs over other loans.  I'm conservative if you haven't guessed.

mistymoney

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on the other hand - 25k is nothing to sneeze at either....especially if you extrapolate what that 25 will be worth from 40 to whatever your end of times may be.

It's a little inspiring to see that you've gotten to a career point where that costly education is really going to pay off. Kudos!

And good luck moving forward.

FatFI2025

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This isn't the most financially optimal, but it's what I would do as an in-between option:

Refi to 4.5% and have your practice buy both disability and life insurance policies, which you need regardless of whether you refi.

Keep the extra $50K in high interest savings to grow your practice.

As a target, aim to payoff the loans by the time TCJA expires Dec 31, 2025. Looks like a payment around $2,200/mo. Assuming you're a pass-through entity, you get a 20% deduction for QBI up to $417K, which will go away after TCJA expires. After that you'll want to max solo 401k and a cash balance plan, so good to payoff loans before the expiration.

While you're paying off, you will likely have extra income left over, which should go to a solo 401k. If you make $2,200/mo payments and max your solo 401K, apply excess funds to the SLs.
« Last Edit: May 27, 2019, 10:58:41 AM by FatFI2025 »

RWD

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Refinance, invest.

ReadySetMillionaire

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Permission to pay of those loans ASAP granted! If you can put 80k a year plus your 50k extra towards them, youíll actually be done in less than 1.5 years. I think itís worth going all in with that short timeframe; itís not going to put you too far back in investments/taxes and will be a huge a mental relief. I actually was just talking with an ex-coworker who did time at a big firm for 3 years before going gov and she talked about how sheís so glad she paid her law school loans off ASAP while at the firm and that even now, over seven years later, she gets a surge of relief whenever someoneís talking about their loans. She said having that mental weight gone is indescribable and (as someone with 250k) I can 100% believe it.

No way would I refinance with your numbers. You have a baby (congrats btw), your wifeís income is not very high, and youíre self-employed. What happens if you have an accident and become permanently disabled or die? With federal loans your loans are discharged. With private? Iím not aware of any private loan discharging for disability, and death depends in your contract and/or state laws. Private loans donít adjust based on income, federal loans do, so if something less drastic happens that greatly reduces your income, youíre also covered with federal loans. Otherwise if you do refinance, make sure your life/disability insurance amounts are enough to both provide for your family and wipe out the loans.

If you use the 50k to pay down highest interest, your new average is about 6% or only 1.5% higher than the refinance option. Thatís only $1461 more in interest if you pay off the rest of loans in 1.5 years, but you gain the disability, death, and flexibility benefits by keeping federal. Plus then you donít have to go through hassle of refinancing. And really if you give yourself permission to throw everything at these loans, I have a feeling they will actually be gone in a year. Honestly even over a  10 year pay off period, Iíd probably view the extra $1775 a year in interest as worth the flexibility fed loans provide.

This is almost exactly my thinking.

I know the math will marginally demonstrate that refinancing and investing will probably be the most optimal choice, but this is such a relatively short time frame that the impact should not be *that* severe.

For those who disagree, what are some of the non-math downsides I may be missing?

SwordGuy

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If you can pay it off in 1.5 years without investing, then you should be maxing out your 401k and IRA.  At the very least, contribute to the 401k up to the employer match.

Take 2 to 3 years to pay them off instead and you'll have a good start on your nest egg at the same time.


Oh, wait a minute!  You're starting your own practice, i.e., business.   You can set up a self-employed 401k and contribute the regular employee match PLUS contribute the employer side also.   I think that's about $54,000 between the two portions, plus another $5,000 if you're over 50.

Might take a bit longer to pay off those loans but you won't be paying taxes on that money and the tax savings can go towards the loans.

If you can employ your wife you could match her's the same and get your taxable income very low.  That might qualify you for ACA health insurance coverage.  The savings on your health insurance could also go towards the loans.   

You'll have to run the numbers.   And share them back with us so we can all learn the details.


dandarc

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A non-math reason:

Liquidity. Once send that money to pay these loans off, it is gone. More gone than if this was a mortgage. "Lower student loan balance" won't pay medical bills or the mortgage or an expensive repair or the student loan itself if you have a poor quarter and need to come up with some cash.

It is actually safer to have more cash or easily liquidated investments and more low, fixed-rate debt than to have less cash and less debt. Doesn't feel that way in our gut, but it really is less risky that way.

Peachtea

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A non-math reason:

Liquidity. Once send that money to pay these loans off, it is gone. More gone than if this was a mortgage. "Lower student loan balance" won't pay medical bills or the mortgage or an expensive repair or the student loan itself if you have a poor quarter and need to come up with some cash.

It is actually safer to have more cash or easily liquidated investments and more low, fixed-rate debt than to have less cash and less debt. Doesn't feel that way in our gut, but it really is less risky that way.

I think liquidity is actually an argument for paying it off ASAP and staying on fed loans rather than refinancing. If he refinances thatís an inflexible $1555 a month bill. While he canít guarentee his income in next 5 years, he can pretty reasonably predict income in next year or so. Iíd rather wipe out the loans now and then have better cash flow for next ten years in case thereís a turn in business or unanticipated events in the fortune. Plus, remember this is 50k in addition to their emergency fund, not all their liquid assets.

And if he stays on fed loan rather than refinance, then his current payment is based on last yearís lower income until his recent date so his payments are probably much less than $1555. Even after recertifying and with the high income, the income based plan or extended plans will give better cash flow. If his income randomly drops he can just request his income based payment be recalculated and itís set according to new income. Canít do that with a refinanced student loan. Fed loans are the best of student loans to have when shit hits the fan.

fuzzy math

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Honestly I think you feel bad because you haven't made a decision. Regardless of the decision you make, once you have some action towards the plan you will feel much better. Right now you're just reliving your income based repayment snafu.

The math leans heavily towards refinancing and paying over 10 years. I don't understand the complaints about having a $2k bill. You will have that now or later (by paying years later). Or refinance and still pay it off in 2 years since you seem to think you're so flush with cash.

Listen to the advice on the solo 401k and the possibility of employing your wife.

ReadySetMillionaire

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I think liquidity is actually an argument for paying it off ASAP and staying on fed loans rather than refinancing. If he refinances thatís an inflexible $1555 a month bill. While he canít guarentee his income in next 5 years, he can pretty reasonably predict income in next year or so. Iíd rather wipe out the loans now and then have better cash flow for next ten years in case thereís a turn in business or unanticipated events in the fortune. Plus, remember this is 50k in addition to their emergency fund, not all their liquid assets.

And if he stays on fed loan rather than refinance, then his current payment is based on last yearís lower income until his recent date so his payments are probably much less than $1555. Even after recertifying and with the high income, the income based plan or extended plans will give better cash flow. If his income randomly drops he can just request his income based payment be recalculated and itís set according to new income. Canít do that with a refinanced student loan. Fed loans are the best of student loans to have when shit hits the fan.

This is precisely why I don't think refinancing is in the picture.  Again, the federal loans are in themselves a hedge if anything were ever to happen to me. I could request a reduced payment, request a forbearance, etc.

I am certainly becoming more and more open to maybe a bit longer of a plan (60), and maybe longer. I'm taking about an hour today to crunch some numbers, which I will post later.

ReadySetMillionaire

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Honestly I think you feel bad because you haven't made a decision. Regardless of the decision you make, once you have some action towards the plan you will feel much better. Right now you're just reliving your income based repayment snafu.

Don't think at all that it was a snafu; I think everything worked extraordinarily well and as planned.

I do agree that I am at a point of decision fatigue, though, and just need to commit to something, and the idea of lasering in on loans is something that gets me motivated.

frugaliknowit

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"Kill" the loans.  You cannot pass up the risk free return of paying off those loans.

therethere

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I think liquidity is actually an argument for paying it off ASAP and staying on fed loans rather than refinancing. If he refinances thatís an inflexible $1555 a month bill. While he canít guarentee his income in next 5 years, he can pretty reasonably predict income in next year or so. Iíd rather wipe out the loans now and then have better cash flow for next ten years in case thereís a turn in business or unanticipated events in the fortune. Plus, remember this is 50k in addition to their emergency fund, not all their liquid assets.

And if he stays on fed loan rather than refinance, then his current payment is based on last yearís lower income until his recent date so his payments are probably much less than $1555. Even after recertifying and with the high income, the income based plan or extended plans will give better cash flow. If his income randomly drops he can just request his income based payment be recalculated and itís set according to new income. Canít do that with a refinanced student loan. Fed loans are the best of student loans to have when shit hits the fan.

This is precisely why I don't think refinancing is in the picture.  Again, the federal loans are in themselves a hedge if anything were ever to happen to me. I could request a reduced payment, request a forbearance, etc.

I am certainly becoming more and more open to maybe a bit longer of a plan (60), and maybe longer. I'm taking about an hour today to crunch some numbers, which I will post later.

Most student loan refinance loans still have some protections. It's easy to Google. Not sure why this misinformation is always spreading that once you refinance it turns into a regular type of loan. I'm pretty sure most refinancing loans still have those protections. For an example: here is the Earnest terms....


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For our student loan refinance product, deferment may be available to clients pursuing graduate education and while serving active military duty. Generally, interest accrues during the deferment period.

Forbearance is a protection that may be offered by Earnest for clients that are experiencing a documented and verifiable hardship such as:

    Involuntary decrease in income (e.g. reduction in hours, unpaid leave, or change from full-time to part-time employment)
    Involuntary loss of employment (defined as termination at no fault of the client)
    Significant increase in costs that are essential to the home or family (e.g. increase in medical expenses, emergency home repairs or child care)
    Parental leave

We typically require at least 3 months of payments before being eligible for forbearance. Please note that a voluntary resignation from employment, outside of extenuating circumstances, would not qualify for forbearance. During forbearance, interest continues accruing on your loan. We do report periods of forbearance to credit agencies, but this does not affect your credit score.

In the unfortunate event of death or total and permanent disability, Earnest will discharge all student loans.

ReadySetMillionaire

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Here's my math.  I'm assuming I have $75-80k per year to either invest or pay down loans.  I know there are tax considerations here but I will work with my accountant to minimize that burden as much as possible.

Option #1 -- Payoff in 18 Months

Current Retirement Assets: $112,000

Loans will be paid off with $160,000

Retirement Asset Value at 2020: $128,000

Invest $75k/year for 10 years (2030): $1.361M

Note -- I need about $800k to FIRE, so I will have achieved this within 10 years.

Scale back and invest $25k/year for 10 years (2040): $3.046M

No investments from 2040 to 2047 (Age 60): $4.891M

Option #2 -- Payoff in 60 Months

Current Retirement Assets: $112,000

Loans will be paid off with $176,850

Invest $50k/year for 5 years (2019-2023): $466,000 retirement asset value

Invest $75k/year for 6 years (2024-2030): $1.274M

Again, will have FIREd by this point

And so on.

***

These are obviously hypotheticals and make assumptions. I am almost certainly missing something, most presumably relating to taxes. I just don't know how to even take a stab at estimating these owning my own S-Corp, but my assumption is taxes will go up about $7-10k/year.

That said, I think three things even this out.

First, the big issue here is that stretching out the loans means I need more after tax dollars for a longer period of time.  In other words, by accelerating debt payoff, I am only going to have to take a tax punch in the face in two years (2019 and 2020), but then it would be smooth sailing. Conversely, if I refinance, I constantly need more after tax money, and tax brackets are going up under the Trump Tax Bill, so stretching these out isn't really making a huge impact.

Second, again, the time frame is so short that it just doesn't really make a difference.

Third, interest on debt compounds the same as interest on returns. Aggressively paying off is not foregoing that much of a net worth boost.
« Last Edit: May 28, 2019, 12:04:08 PM by ReadySetMillionaire »

ReadySetMillionaire

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Most student loan refinance loans still have some protections. It's easy to Google. Not sure why this misinformation is always spreading that once you refinance it turns into a regular type of loan. I'm pretty sure most refinancing loans still have those protections. For an example: here is the Earnest terms....


------
For our student loan refinance product, deferment may be available to clients pursuing graduate education and while serving active military duty. Generally, interest accrues during the deferment period.

Forbearance is a protection that may be offered by Earnest for clients that are experiencing a documented and verifiable hardship such as:

    Involuntary decrease in income (e.g. reduction in hours, unpaid leave, or change from full-time to part-time employment)
    Involuntary loss of employment (defined as termination at no fault of the client)
    Significant increase in costs that are essential to the home or family (e.g. increase in medical expenses, emergency home repairs or child care)
    Parental leave

We typically require at least 3 months of payments before being eligible for forbearance. Please note that a voluntary resignation from employment, outside of extenuating circumstances, would not qualify for forbearance. During forbearance, interest continues accruing on your loan. We do report periods of forbearance to credit agencies, but this does not affect your credit score.

In the unfortunate event of death or total and permanent disability, Earnest will discharge all student loans.

This is not even close to the level of protection you get with federal student loans.
« Last Edit: May 28, 2019, 09:57:19 AM by ReadySetMillionaire »

YTProphet

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I paid off $135,000 in law school loans in a few years and it is absolutely freeing. You will sleep better without it hanging over your head.

You can concoct all the theoretical mathematical reasons you want for keeping that loan, but, at the end of the day, life can go differently than you expect. Better to just get rid of it in 1.5 years and be done with it.

thurston howell iv

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we paid $220k of student loans with a super aggressive repayment program. We refi'd with one of those providers (I have a link on here somewhere) - and selected the lower rate with the variable option (to keep me focused)  PAID in full within a few years. 

We did not want to have something unforseen pop up and surprise us in the future so we paid it off. THEN something popped up and surprised us and if we had not paid it off, we'd be in a world of hurt.

It's a huge weight off your shoulders!!! I guarantee it :)

Fuzz

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Congrats on your amazing progress.

I would encourage to set up a solo 401K with Vanguard so that you can aggressively max out your pretax retirement contribution. Also, start paying yourself a salary on a W2 and take owner draws for profits. None of this gross revenue minus expenses math. :) Pay yourself a salary and count that. Your tax savings from doing this properly dwarf the potential difference you're talking about. Optimize that.

Once you get the solo 401K with Vanguard set up, I would throw as much as I could at getting the student loans paid off.

A couple reasons: the stock market (maybe not after its recent tariff drop) has a historically high P/E ratio and, while I recognize that market timing is bad, it's a probably a good-ish time to pay student loans instead of investing.  That 9% return someone mentioned is not guaranteed at all.

Also, your career track is on fire. So step on the gas. If you grow another 25%-50% year over year for two years, you can really aggressively invest later. Get rid of the debt to maximize your options. You're getting the big picture right, the invest vs pay down debt is almost a detail for you.

A lawyer's professional inclination is to over-think things. Hence the hand-wringing over how to optimize loan repayment vs investing. But for a self-employed professional, I believe that you're almost always better off trying to increase your income than trying to really minimize every expense (except hiring, that's hard, and it makes sense to delay that overhead).

One good Plaintiff's case pays for that $25K difference. One great case pays off that house. In 10 years, how many opportunities will you have to get another good or great case?

Enjoy the ride. I hope you're taking a lot of satisfaction from the journey and for the difference you're making for your clients. It's impressive. Congrats.

Fuzz

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Also why the urgency to FIRE in 5-7 years? Isn't the practice fun?

ReadySetMillionaire

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Also why the urgency to FIRE in 5-7 years? Isn't the practice fun?

Thanks for your advice, as always @Fuzz.

No urgency at all to FIRE.  Just noting that I will be FI by then and the debt payoff vs. invest strategies don't really change this date that much.

ReadySetMillionaire

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FYI, paid off the 7.65% loan today (about $29,000).  Balance is down to about $122,000.  Going to pay a couple of the smaller next highest interest rate loans by the end of June.

Goal is to get down to $75,000 by the end of the year.

SimpleCycle

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I'm not great at back of the envelope math, but I am good at using calculators on the internet.  Refinancing and putting $54k into a solo 401k wins by about $175k over 10 years.

Here are the numbers I used for the math:

https://docs.google.com/spreadsheets/d/1FDNLnyh2Nu3jnC2NCIJtGqIUlC-76ZOoVrsK7xT8oOs/edit?usp=sharing

Here is how I calculated the taxes:

https://www.hrblock.com/tax-calculator/#/en/te/aboutYou

And here is the simulator I used to estimate the portfolio values:

https://www.portfoliovisualizer.com/monte-carlo-simulation

The results I gave are the 50th percentile results.


I personally like to keep maximum financial flexibility, and so a scenario where I have money to invest in taxable and also come out ahead financially would be a clear winner in my book, even if it meant carrying debt for another 10 years.  But I understand the desire to get rid of the debt as soon as possible on an emotional level.

ReadySetMillionaire

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I'm not great at back of the envelope math, but I am good at using calculators on the internet.  Refinancing and putting $54k into a solo 401k wins by about $175k over 10 years.

Here are the numbers I used for the math:

https://docs.google.com/spreadsheets/d/1FDNLnyh2Nu3jnC2NCIJtGqIUlC-76ZOoVrsK7xT8oOs/edit?usp=sharing

Here is how I calculated the taxes:

https://www.hrblock.com/tax-calculator/#/en/te/aboutYou

And here is the simulator I used to estimate the portfolio values:

https://www.portfoliovisualizer.com/monte-carlo-simulation

The results I gave are the 50th percentile results.


I personally like to keep maximum financial flexibility, and so a scenario where I have money to invest in taxable and also come out ahead financially would be a clear winner in my book, even if it meant carrying debt for another 10 years.  But I understand the desire to get rid of the debt as soon as possible on an emotional level.

How would you factor in RMDs into this analysis? I'm hesitant to shove a ton of money into Solo 401k because that will balloon and probably get taxed even more once I need to take it out.

Yes, I could do the Roth conversion ladder and all that, but I don't know if I could transfer *that* much successfully.

SimpleCycle

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I think a good mix of taxable, tax-deferred, and tax-free investments makes the most sense for an early retiree.  I'd aim to Roth convert as much as makes sense tax wise at the time of conversion, which can add up to a pretty substantial amount over the course of early retirement.  If at some point it seems like you have too much in the solo 401k, you can stop contributing, but the tax advantage on the front end is substantial and compounds when you have a long enough time horizon.

ReadySetMillionaire

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I think a good mix of taxable, tax-deferred, and tax-free investments makes the most sense for an early retiree.  I'd aim to Roth convert as much as makes sense tax wise at the time of conversion, which can add up to a pretty substantial amount over the course of early retirement.  If at some point it seems like you have too much in the solo 401k, you can stop contributing, but the tax advantage on the front end is substantial and compounds when you have a long enough time horizon.

What percent rate of returns are you assuming? I did similar calculations and, as you can see, did not have as much disparity as yours.

Also, I think the tax numbers are a bit off, although that would be impossible for you (and me) to guess given my S-Corp status.

SimpleCycle

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I think a good mix of taxable, tax-deferred, and tax-free investments makes the most sense for an early retiree.  I'd aim to Roth convert as much as makes sense tax wise at the time of conversion, which can add up to a pretty substantial amount over the course of early retirement.  If at some point it seems like you have too much in the solo 401k, you can stop contributing, but the tax advantage on the front end is substantial and compounds when you have a long enough time horizon.

What percent rate of returns are you assuming? I did similar calculations and, as you can see, did not have as much disparity as yours.

Also, I think the tax numbers are a bit off, although that would be impossible for you (and me) to guess given my S-Corp status.

Oh, I assumed regular self-employment income for the taxes.

It would appear the median rate of return in portfolio visualizer is 10.49%, which is a bit aggressive (!!!).  If we assume the 25th percentile of returns, it drops to 6.3%, which makes me feel better and results in the following numbers:

Refi loans, invest difference - $839k in 401k, $404k in taxable
Aggressive payoff, later investing - $600k in 401k, $498 in taxable

However, I really like Fuzz's perspective here.  There's a good chance you'll continue to be successful at growing your business and we're probably talking about rounding error here.  Either way you are FI in less than 10 years, which is awesome.

Fuzz

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FYI, paid off the 7.65% loan today (about $29,000).  Balance is down to about $122,000.  Going to pay a couple of the smaller next highest interest rate loans by the end of June.

Goal is to get down to $75,000 by the end of the year.

Nice work knocking that one out!

ReadySetMillionaire

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FYI, paid off the 7.65% loan today (about $29,000).  Balance is down to about $122,000.  Going to pay a couple of the smaller next highest interest rate loans by the end of June.

Goal is to get down to $75,000 by the end of the year.

Nice work knocking that one out!

Had a bottle of red after that one.

ysette9

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Good for you!

ReadySetMillionaire

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Probably going to turn this into a journal of sorts. Remaining loans are as follows:

6.55% Loans

$2,954 (Payoff by end of June)
$5,428 (End of June)
$8,753 (End of July)
$16,340 (End of September)
$26,318 (Very Ambitious -- End of Year)

6.16% Loans

$8,095 (March 2020)
$23,239 (June 2020)

5.35% Loans

$5,766 (July 2020)

5.16% Loans

$23,619 (End of 2020)

Peachtea

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Please yell ďtake that fed loan!Ē for each one you pay off. Thatís what Iíd do anyway...and maybe did for my sallie mae freakin 10% student loans from undergrad. :D

TVRodriguez

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Hi RSM!
I like the idea of maxing your retirement account for the year and then paying towards the loans.  If you are able to contribute to a Roth IRA, do it, and if not, then you can do a solo 401(k) or a SEP-IRA.  Do one of them.  Like @Peachtea said, I would look carefully at any possible loan forgiveness at death before committing to a refinance.  I think you made the right call there.  Congrats on getting rid of one of them already!

Personally, DH & I prefer to lower our overhead to keep our life simple, so we put as much as we could towards paying off the student loans after maxing out any retirement benefits for the year.  Then we did the same for the mortgage.

And as @Fuzz said, being a solo is fun, and we get to provide real value to our clients!  Enjoy it.

ReadySetMillionaire

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7.65% Loans

$28,104 -- PIF 05/29/2019

6.55% Loans

$2,954 (Payoff by end of June) -- PIF 06/13/2019
$5,428 (End of June) -- PIF 06/13/2019
$8,753 (End of July)
$16,340 (End of September)
$26,318 (Very Ambitious -- End of Year)

6.16% Loans

$8,095 (March 2020)
$23,239 (June 2020)

5.35% Loans

$5,766 (July 2020)

5.16% Loans

$23,619 (End of 2020)

YTProphet

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Way to get after it man! That's awesome. It's so freeing not to have any date, especially when you've got kiddos.

Fuzz

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Awesome work!

Dicey

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RSM, you know I'm a fan. Another vote for stuffing your retirement accounts full first. Refi the SL's. Concurrently, look at your mortgage asap. Rates have dropped a ton in the last few weeks. If you can save anywhere close to a point on a thirty year fixed mortgage, with minimal costs do eet!

Save on mortgage interest
Save on SL interest
Stuff your 401k, HSA, IRA, whatever you qualify for
Keep a fat, fat EF (6 months at least, because you're self employed)
Then swing for the fences with every penny you're saving and knock the shit out of those nasty student loans.*

*Just remember those SL's got you to where you are today. They deserve your respect. So kiss the ball before you Barry Bonds it outta the park.

ReadySetMillionaire

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RSM, you know I'm a fan. Another vote for stuffing your retirement accounts full first. Refi the SL's. Concurrently, look at your mortgage asap. Rates have dropped a ton in the last few weeks. If you can save anywhere close to a point on a thirty year fixed mortgage, with minimal costs do eet!

Save on mortgage interest
Save on SL interest
Stuff your 401k, HSA, IRA, whatever you qualify for
Keep a fat, fat EF (6 months at least, because you're self employed)
Then swing for the fences with every penny you're saving and knock the shit out of those nasty student loans.*

*Just remember those SL's got you to where you are today. They deserve your respect. So kiss the ball before you Barry Bonds it outta the park.

You know I appreciate all the advice, @Dicey .  There seems to be more and more posts indicating to save for retirement *after* I made the decision to just pay these damn things off. *Really loud sigh.*

This all leads to a ton of mental gymnastics for me -- thinking about these becomes like a freight train that can derail an entire morning. Should I pay them off? Save for retirement? If so what accounts? Maybe I should balance it? It all is too much.

This is partly why my attitude is just sort of "fuck it" and, as you put it, Barry Bonds these loans out of the park and briefly ignore the math. But maybe that's not smart. Who knows.

Something that just triggered in my mind -- perhaps set number goals each year for the next three years, but prioritize loans first.  For instance, this year I got my loans down from $159,000 to $114,000 right now. I can easily get them to $100,000. Once I do that, *then* I can stuff retirement accounts for the rest of the year.

Then in 2020, get them down to $50,000, *then* save for retirement.

Then in 2021, pay them off, *then* save for retirement.

Or maybe some variation of this. Down to $110,000; $75,000; $35,000, $0 over four years; or some variation.

This prioritizes loans, gives me clear goals and benchmarks to accomplish, but still saves for retirement.

Just another thought in this meatball of a brain that I have. But personal finance is personal, and I simply do not like debt. I simply am not going to let these linger because they are too much of a pain in my ass.

Thoughts @TVRodriguez , @Fuzz , @YTProphet , @Peachtea , @SimpleCycle ?
« Last Edit: June 17, 2019, 09:15:56 AM by ReadySetMillionaire »

MrThatsDifferent

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Youíre doing great, keep it up. I get the mental gymnastics but the way I see it, you canít really lose either way. Youíre going to have these loans killed in the next 18 months. From that level of savings and discipline you just funnel into your retirement accounts and they will fill up before you know it. Youíre also still quite young so your money will grow. If it was going to take you 5 years, Iíd do the dual investing/paying debt strategy, but not 18 months. There are few things better than eliminating that type of debt. Hereís the other thing Iíve learned since my MMM journey. Once you form your plan, stick to it! Sure, you can refine, but you have enough on your plate with your business, self, marriage and baby. Donít waste the mental energy. You set this up, now just keep following through. Good luck!

dandarc

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 There seems to be more and more posts indicating to save for retirement *after* I made the decision to just pay these damn things off. *Really loud sigh.*


Bullshit. Plenty of variations of this:

Refinance, invest.

before you posted "I just paid off $29K!"

Not that paying these loans off is a bad use of money - just less optimal. I'm sure everyone has some of these sub-optimal decisions in their finances, so nothing to feel bad about. I personally own a house that has no mortgage on it - we need to fix that and haven't in spite of knowing the math for at least 3-4 years now (#freeboarder42). Just did the back of the napkin math "what if we had $100K more invested in June 2016 instead of a paid-off house" - $40-50K more money today, just 3 years later. Goddamn.

As you've noted, even though this is a choice you've made that will cost you a 6 figure sum within a decade, you still get to FI pretty darn quick so not that big a deal in the grand scheme of things.

TVRodriguez

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Something that just triggered in my mind -- perhaps set number goals each year for the next three years, but prioritize loans first.  For instance, this year I got my loans down from $159,000 to $114,000 right now. I can easily get them to $100,000. Once I do that, *then* I can stuff retirement accounts for the rest of the year.

Then in 2020, get them down to $50,000, *then* save for retirement.

Then in 2021, pay them off, *then* save for retirement.

Or maybe some variation of this. Down to $110,000; $75,000; $35,000, $0 over four years; or some variation.

This prioritizes loans, gives me clear goals and benchmarks to accomplish, but still saves for retirement.

Just another thought in this meatball of a brain that I have. But personal finance is personal, and I simply do not like debt. I simply am not going to let these linger because they are too much of a pain in my ass.

Thoughts @TVRodriguez , @Fuzz , @YTProphet , @Peachtea , @SimpleCycle ?

Like you, I don't like debt.  Like you, I can lose a morning thinking over these things.  It sounds like you have a plan, and based on your history as posted on these message boards, I'm inclined to believe that you will follow through and keep on trucking.  So you'll be more than fine over time.

Personally, since you asked, I'd put at least $10,000 towards retirement each year before paying extra on the loans, just to have something going towards retirement (b/c you know you will pay the minimums on the loans and you know you will put anything extra to get rid of them).  But don't lose sleep over it.  Your plan of hitting your student loan target for the year and THEN putting towards retirement might give you more impetus, and if it works for you then great.

Just make sure you have enough to pay your taxes, too, on all that income you're generating from your practice.

Raenia

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Something that just triggered in my mind -- perhaps set number goals each year for the next three years, but prioritize loans first.  For instance, this year I got my loans down from $159,000 to $114,000 right now. I can easily get them to $100,000. Once I do that, *then* I can stuff retirement accounts for the rest of the year.

Then in 2020, get them down to $50,000, *then* save for retirement.

Then in 2021, pay them off, *then* save for retirement.

Or maybe some variation of this. Down to $110,000; $75,000; $35,000, $0 over four years; or some variation.

This prioritizes loans, gives me clear goals and benchmarks to accomplish, but still saves for retirement.

Just another thought in this meatball of a brain that I have. But personal finance is personal, and I simply do not like debt. I simply am not going to let these linger because they are too much of a pain in my ass.

Thoughts @TVRodriguez , @Fuzz , @YTProphet , @Peachtea , @SimpleCycle ?

Like you, I don't like debt.  Like you, I can lose a morning thinking over these things.  It sounds like you have a plan, and based on your history as posted on these message boards, I'm inclined to believe that you will follow through and keep on trucking.  So you'll be more than fine over time.

Personally, since you asked, I'd put at least $10,000 towards retirement each year before paying extra on the loans, just to have something going towards retirement (b/c you know you will pay the minimums on the loans and you know you will put anything extra to get rid of them).  But don't lose sleep over it.  Your plan of hitting your student loan target for the year and THEN putting towards retirement might give you more impetus, and if it works for you then great.

Just make sure you have enough to pay your taxes, too, on all that income you're generating from your practice.

I agree with TVRodriguez that this is a good approach, but that you should switch the order around and save a certain amount for retirement, *then* pay down debt for the rest of the year.  This has the advantage of front-loading your investments, so you get more time in the market, while also letting you scratch the itch to pay down debt.  As a bonus, anything *extra* that you can save beyond what you plan, either by cutting expenses or side-hustling, will be able to go toward debt, giving you extra warm fuzzies.